IPS DEVELOPMENT BULLETIN – ERITREA: Monetary Divorce From Ethiopia

By IPS Correspondents Reprint | | Print |

Laeke Mariam Demessie

ADDIS ABABA, Aug 2 1997 (IPS) - Although it fought a long war of independence against Ethiopia, Eritrea had kept using the Ethiopian birr after becoming Africa’s newest nation in 1993, but it has now adopted a national currency.

The introduction of the Nafka was proclaimed in mid-July in Eritrea’s Official Gazette, but the two currencies will co-exist in Eritrea for an unspecified period of time. However, the country’s authorities instructed any Eritrean who owned more than 5,000 ir to trade it in it for nafka.

Since then, many Eritreans have been flocking to Ethiopia to deposit their birr in banks here, according to ‘Tobia’, a private Ethiopian weekly.

The nafka, whose exchange rate to the Birr has been set at one to one (the birr exchanges at about 6.50 to the U.S. dollar), owes its name to a mountainous area that was an impregnable stronghold of the Eritrean Liberation Front (EPLF) during its 30-year war for the independence of the former Ethiopian province.

Reactions to its introduction have been mixed in Ethiopia. One political analyst specialising in the Horn of Africa saw it as a running counter to efforts by the Organisation of African Unity (OAU) and the Inter-Governmental Authority on Development (IGAD), to encourage economic integration.

IGAD is a sub-regional organisation that links Djibouti, Eritrea, Ethiopia, Kenya, Somalia, Sudan and Uganda.

“The ultimate objective of IGAD and the OAU is to create regional economies and similar currencies,” the analyst told IPS. “The European Union is going over to mono-currency and economic union. That will give Europe better strength to compete with the United States. Eritrea and Ethiopia would separating to come together again.”

He added that Eritrean President Issaias Afewerki had talked some years ago about working towards a confederation with Ethiopia, but the introduction of the nafka is not a step in that direction.

An economist interviewed by IPS held a different view. Even though Eritrea had political independence, it did not control its monetary policy since it was using the Ethiopian birr, he said. “… with its own money Eritrea will have complete sovereignty,” added the economist who, like many sources here, preferred to remain anonymous.

But using the birr had provided Eritrea with a number of benefits, according to another economic expert here. These included accumulating hard currency through the re-export of Ethiopian products.

Eritreans have for example been able to buy Ethiopian coffee using birr and export it for U.S. dollars.

According to a political observer, Ethiopian merchants will be happy with the changeover, because their Eritrean counterparts have been able to sell some goods more cheaply in Ethiopia since they paid lower taxes.

“The Ethiopian merchants were complaining because products like shoes produced by Eritrea face 12-percent tax, while Ethiopians have to pay 40-percent tax on the same product,” he explained. “The same is true with technological products that come from Eritrea and flood the Ethiopian market.”

On the other hand, sme of the 500,000 Eritreans living in Ethiopia could be affected by the introduction of the nakfa, according to a senior economist who is highly placed in the Ethiopian government.

“Rich Eritreans are uncertain about the Nakfanization of their money so they are buying U.S. dollars like crazy and are making bulk purchases of Ethiopian goods,” he told IPS, adding that this had already caused prices to rise in Ethiopia.

“After Nakfa, if half-a-million Eritreans in Ethiopia are to be treated like other foreigners — like Greeks, Indians, Kenyans and others residing in Ethiopia — they will find it difficult to send out money to Eritrea,” he said. “… foreigners are allowed to send out only a limited amount of money out of Ethiopia, which hasn’t been the case with Eritreans thus far.”

Other observers wonder at the exchange rate the Eritrean government has set for the nafka.

“How on earth can the currency of a new poor nation like Eritrea, an overnight currency, pretend parity with the Ethiopian birr?” commented Tadesse Gassesse, regional director for Africa of Consumers International. “Ethiopia is an agricultural nation with industrial transformation and a population of 56 million. Nobody will accept the parity of the nakfa and the birr.”

“The relation of the nakfa to the birr will be decided in Port Sudan, Nairobi, Mombasa, Saudi Arabia, Aden, Sanaa, Djibouti and Khartoum, where the birr and other currencies of the Horn of Africa and Gulf States are openly sold and exchanged,” he predicted. “The Ethiopian birr has coffee, hides and skins, livestock and khat (a narcotic leaf chewed by people in the Horn of Africa) to back it.”

He feels the monetary divorce is likely to affect Eritreans who buy, and sometimes re-export, Ethiopian goods.

“The Ethiopian birr was the passport of Eritrean exports,” Gassesse explained. “The Nakfa will face a challenging time even if Ethiopians are allowed to possess or use the currency.

“There is a psychology involved with currency. The average Ethiopian peasant farmer would not trust the nakfa and sell his produce like teff (the staple grain in both counries), wheat, barley, or any other agricultural products”.